By CountingPips.com
The Reserve Bank of Australia (RBA) unexpectedly decided to hold its interest rate steady at the 3.75 percent level today according to the government announcement. The RBA had increased the interest rate level by 25 basis points for three consecutive meetings before today’s announcement. The decision to maintain the current rate caught the markets off-guard as it was widely expected the RBA would raise the cash rate to 4.00 percent. The Australian dollar felt the effects and declined 
immediately in forex trading following the announcement.
Australia became the first G20 economy to increase its interest rate since the financial crisis when the RBA hiked the rate in October 2009. October’s rate increase was the first Australian rate change since April 2009 when the RBA decreased the rate by 25 basis points to a 49-year low at the 3.00 percent level.
Australia’s economy handled the economic crisis better than most others as a technical recession was avoided with the help of government stimulus as well as strong demand for Australian goods from China.
Australia’s Glenn Stevens, Governor of Monetary Policy, said in his policy statement today that, “The global economy is growing, and world GDP is expected to rise at close to trend pace in 2010 and 2011. The expansion is still likely to be modest in the major countries, due to the continuing legacy of the financial crisis, resulting in ongoing excess capacity. In Asia, where financial sectors are not impaired, recovery has been much quicker to date, though the Chinese authorities are now seeking to reduce the degree of stimulus to their economy. Global financial markets are functioning much better than they were a year ago.”
On the Australian economy, Stevens commented, “In Australia, economic conditions have been stronger than expected, after a mild downturn a year ago. The effects of the fiscal stimulus on consumer demand have now faded, but household finances are being supported by strong labour market outcomes and a recovery in net worth.”
Stevens also said that inflation has continued to be moderate and that unemployment has most likely peaked at a level that is lower than previously expected.
The reason for the interest rate hold after three straight rate increases was because “information about the early impact of those changes is still limited”. The statement said that the policy will likely be adjusted if the economic conditions continue to improve.
The Australian dollar fell sharply after the interest rate announcement as the Aussie has declined against the U.S. dollar, euro, British pound, Japanese yen, New Zealand dollar and the Canadian dollar. The Aussie fell by over 100 pips against the U.S. dollar and Japanese yen early this morning before paring some of those losses and edging back higher. The euro is still trading higher against the Aussie by over 150 pips as the EUR/AUD reached its highest trading level in about a month at 1.5864 earlier today.
AUD/USD Hourly Chart – The Australian dollar falling sharply versus the US dollar in forex trading today after the RBA held its interest rate at 3.75%. The AUD/USD traded below the 0.8800 exchange rate today before turning around. The AUD/USD has been down trending since reaching a 0.9330 highpoint on January 14th.
